##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 24, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 033-43247
 INSURANCE AUTO AUCTIONS, INC.
  Illinois
    
    95-3790111(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 Two Westbrook Corporate Center, Suite 500, Westchester, Illinois 60154
 (708) 492-7000
 o þ
  o o þ
 o þ




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##### 



INSURANCE AUTO AUCTIONS, INC.
 Form 10-Q
 Table of Contents
 Page NumberPart I. Financial InformationItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    20Overview
    
    
    20Significant Items Affecting Comparability
    
    
    20Acquisitions and New Operations
    
    
    21Results of Operations
    
    
    21Financial Condition and Liquidity
    
    
    23Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33Part II. Other Information
    
    
    34Item 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 6. Exhibits
    
    
    34Signatures
    
    
    35Amendment to the Stock Incentive PlanCertification by the CEOCertification by the CFOCertification by the CEOCertification by the CFO




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##### Table of Contents



Part I
Financial Information
 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
(unaudited)
 SUCCESSOR
    
    
    SUCCESSORSeptember 24,
    
    
    December 25,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    34,866
    
    
    $
    25,882Accounts receivable, net
    
    
    51,967
    
    
    
    46,920Inventories
    
    
    19,199
    
    
    
    19,611Income taxes receivable
    
    
    2,878
    
    
    
    2,732Deferred income taxes
    
    
    8,853
    
    
    
    8,511Other current assets
    
    
    7,601
    
    
    
    5,323Total current assets
    
    
    125,364
    
    
    
    108,979Property and equipment, net
    
    
    77,847
    
    
    
    77,231Intangible assets, net
    
    
    141,690
    
    
    
    126,378Goodwill
    
    
    248,720
    
    
    
    191,266Other assets
    
    
    8,518
    
    
    
    11,006$
    602,139
    
    
    $
    514,860LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    46,910
    
    
    $
    38,022Accrued liabilities
    
    
    20,074
    
    
    
    17,445Obligations under capital leases
    
    
    254
    
    
    
    367Current installments of long-term debt
    
    
    1,950
    
    
    
    1,143Total current liabilities
    
    
    69,188
    
    
    
    56,977Deferred income taxes
    
    
    36,294
    
    
    
    37,582Other liabilities
    
    
    12,703
    
    
    
    12,765Obligations under capital leases
    
    
    158
    
    
    
    329Senior notes
    
    
    150,000
    
    
    
    150,000Long-term debt, excluding current installments
    
    
    193,050
    
    
    
    113,183Total liabilities
    
    
    461,393
    
    
    
    370,836Shareholders equity:Common stock, par value of $.01 per share
100 shares authorized, issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    151,045
    
    
    
    149,458Accumulated other comprehensive loss
    
    
    (29
    )
    
    
    Accumulated deficit
    
    
    (10,270
    )
    
    
    (5,434
    )Total shareholders equity
    
    
    140,746
    
    
    
    144,024$
    602,139
    
    
    $
    514,860
  1




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##### Table of Contents



INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 THREE MONTHS ENDED
    
    
    NINE MONTHS ENDEDSUCCESSOR
    
    
    SUCCESSOR
    
    
    SUCCESSOR
    
    
    SUCCESSOR
    
    
    PREDECESSORMay 25 
    
    
    December 27,September 24,
    
    
    September 25,
    
    
    September 24,
    
    
    September 25,
    
    
    2004 - May 24,2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2005Revenues:Fee income
    
    $
    69,535
    
    
    $
    58,087
    
    
    $
    202,680
    
    
    $
    77,329
    
    
    $
    103,203Vehicle sales
    
    
    13,963
    
    
    
    10,056
    
    
    
    36,775
    
    
    
    13,175
    
    
    
    17,24283,498
    
    
    
    68,143
    
    
    
    239,455
    
    
    
    90,504
    
    
    
    120,445Cost of sales:Branch cost
    
    
    52,847
    
    
    
    42,456
    
    
    
    151,066
    
    
    
    56,937
    
    
    
    72,554Vehicle cost
    
    
    12,621
    
    
    
    8,643
    
    
    
    31,972
    
    
    
    11,295
    
    
    
    14,64065,468
    
    
    
    51,099
    
    
    
    183,038
    
    
    
    68,232
    
    
    
    87,194Gross margin
    
    
    18,030
    
    
    
    17,044
    
    
    
    56,417
    
    
    
    22,272
    
    
    
    33,251Operating expense:Selling, general and
administrative
    
    
    13,444
    
    
    
    10,182
    
    
    
    36,681
    
    
    
    13,582
    
    
    
    15,822Loss (gain) on sale of
property and equipment
    
    
    (35
    )
    
    
    351
    
    
    
    (18
    )
    
    
    368
    
    
    
    (896
    )Loss related to flood
    
    
    281
    
    
    
    
    
    
    
    3,451
    
    
    
    
    
    
    
    Merger costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,021
    
    
    
    15,74113,690
    
    
    
    10,533
    
    
    
    40,114
    
    
    
    18,971
    
    
    
    30,667Income
from operations
    
    
    4,340
    
    
    
    6,511
    
    
    
    16,303
    
    
    
    3,301
    
    
    
    2,584Other (income) expense:Interest expense
    
    
    8,231
    
    
    
    6,350
    
    
    
    21,424
    
    
    
    8,992
    
    
    
    567Loss on early extinguishment
of debt
    
    
    1,771
    
    
    
    
    
    
    
    1,771
    
    
    
    
    
    
    
    Other income
    
    
    (102
    )
    
    
    (140
    )
    
    
    (348
    )
    
    
    (181
    )
    
    
    (2,442
    )Income (loss) before taxes
    
    
    (5,560
    )
    
    
    301
    
    
    
    (6,544
    )
    
    
    (5,510
    )
    
    
    4,459Income taxes
    
    
    (1,300
    )
    
    
    (206
    )
    
    
    (1,708
    )
    
    
    (1,517
    )
    
    
    4,899Net income (loss)
    
    $
    (4,260
    )
    
    $
    507
    
    
    $
    (4,836
    )
    
    $
    (3,993
    )
    
    $
    (440
    )
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##### Table of Contents



INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 SUCCESSOR
    
    
    SUCCESSOR
    
    
    PREDECESSORNine Months Ended
    
    
    May 25, 2005 
    
    
    December 27, 2004 September 24, 2006
    
    
    September 25, 2005
    
    
    May 24, 2005Cash flows from operating activities:Net loss
    
    $
    (4,836
    )
    
    $
    (3,993
    )
    
    $
    (440
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Loss on change in fair market value of interest
rate cap
    
    
    (29
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    17,147
    
    
    
    6,340
    
    
    
    5,464(Gain) loss on disposal of fixed assets, including
disposal of assets as a result of the Texas flood
    
    
    733
    
    
    
    368
    
    
    
    (896
    )Share-based compensation expense
    
    
    1,437
    
    
    
    
    
    
    
    Amortization of debt issuance costs
    
    
    1,017
    
    
    
    
    
    
    
    Loss on early extinguishment of debt
    
    
    1,771
    
    
    
    
    
    
    
    Deferred compensation related to restricted stock
    
    
    
    
    
    
    
    
    
    
    4,343Deferred income taxes
    
    
    (702
    )
    
    
    (787
    )
    
    
    (1,448
    )Tax benefit related to employee stock compensation
    
    
    
    
    
    
    678
    
    
    
    8,394(Increase) decrease in:Accounts receivable, net
    
    
    (612
    )
    
    
    14,314
    
    
    
    (5,312
    )Income tax receivable
    
    
    
    
    
    
    (1,270
    )
    
    
    (2,618
    )Inventories
    
    
    1,296
    
    
    
    (726
    )
    
    
    (472
    )Other current assets
    
    
    1,971
    
    
    
    (2,524
    )
    
    
    (520
    )Other assets
    
    
    56
    
    
    
    887
    
    
    
    (827
    )Increase (decrease) in:Accounts payable
    
    
    8,759
    
    
    
    (15,122
    )
    
    
    6,719Accrued liabilities
    
    
    1,259
    
    
    
    (5,448
    )
    
    
    12,279Income taxes
    
    
    370
    
    
    
    
    
    
    
    (1,067
    )Total adjustments
    
    
    34,473
    
    
    
    (3,290
    )
    
    
    24,039Net cash provided by (used in) operating activities
    
    
    29,637
    
    
    
    (7,283
    )
    
    
    23,599Cash flows from investing activities:Purchase of IAA, Inc.
    
    
    
    
    
    
    (356,753
    )
    
    
    Capital expenditures
    
    
    (12,115
    )
    
    
    (5,904
    )
    
    
    (8,221
    )Payments made in connection with acquisitions,
net of cash acquired
    
    
    (88,955
    )
    
    
    (271
    )
    
    
    (600
    )Proceeds from disposal of property and equipment
    
    
    1,368
    
    
    
    225
    
    
    
    1,391Net cash used in investing activities
    
    
    (99,702
    )
    
    
    (362,703
    )
    
    
    (7,430
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    905Contributed capital
    
    
    150
    
    
    
    143,600
    
    
    
    Proceeds from short-term borrowings
    
    
    
    
    
    
    
    
    
    
    3,000Payment of financing and other fees
    
    
    (1,491
    )
    
    
    (13,530
    )
    
    
    Principal payments on long-term debt
    
    
    (573
    )
    
    
    (22,125
    )
    
    
    (3,762
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (1
    )Repayment of term loan
    
    
    (32,651
    )
    
    
    
    
    
    
    Proceeds from amended term loan
    
    
    113,898
    
    
    
    
    
    
    
    Principal payments on capital leases
    
    
    (284
    )
    
    
    (303
    )
    
    
    (614
    )Issuance of senior notes
    
    
    
    
    
    
    150,000
    
    
    
    Issuance of term loan
    
    
    
    
    
    
    115,000
    
    
    
    Net cash provided by (used in) financing activities
    
    
    79,049
    
    
    
    372,642
    
    
    
    (472
    )Net increase in cash
    
    
    8,984
    
    
    
    2,656
    
    
    
    15,697Cash at beginning of period
    
    
    25,882
    
    
    
    29,022
    
    
    
    13,325Cash at end of period
    
    $
    34,866
    
    
    $
    31,678
    
    
    $
    29,022Supplemental disclosures of cash flow information:Cash paid or refunded during the period for:Interest
    
    
    16,199
    
    
    
    1,987
    
    
    
    689Income taxes paid
    
    
    574
    
    
    
    147
    
    
    
    1,654Income taxes refunded
    
    
    1,966
    
    
    
    5,111
    
    
    
    26Non-cash transactions:Options exchanged in merger transaction
    
    $
    
    
    
    $
    5,653
    
    
    $
    
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INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 (1)
    
    Summary of Business and Significant Accounting PoliciesAs used in these notes, unless the context requires otherwise, the Company, IAAI, we,
us, our, and other similar terms refer to Insurance Auto Auctions, Inc. and its
subsidiaries. IAAI is a wholly-owned subsidiary of Axle Holdings, Inc., a Delaware
corporation (Axle Holdings), which is a wholly-owned subsidiary of Axle Holdings II, LLC, a
Delaware limited liability company (LLC) that is controlled by affiliates of Kelso &
Company, L.P. (Kelso).BackgroundIAAI operates in a single business segmentproviding insurance companies and other vehicle
suppliers cost-effective salvage processing solutions, including selling total loss and
recovered theft vehicles. Fiscal year 2005 consisted of 52 weeks and ended on December 25,
2005. Fiscal year 2006 consists of 53 weeks and will end on December 31, 2006. The
additional week occurs in the fourth quarter.On May 25, 2005, the Company completed the merger transactions that are described in Note 2
below. These transactions resulted in many differences between reporting for IAAI
post-merger, as successor, and IAAI pre-merger, as predecessor. The accompanying condensed
consolidated financial statements and the notes to the condensed consolidated financial
statements reflect separate reporting periods for the predecessor and successor company where
applicable.Principles of ConsolidationThe accompanying unaudited condensed consolidated financial statements include the accounts
of IAAI and its wholly-owned subsidiaries and have been prepared in accordance with
accounting principles generally accepted in the United States (GAAP) for interim financial
reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by GAAP for complete financial statements.In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting of normal recurring items, unless otherwise
noted) necessary for a fair presentation of results for the interim periods presented. The
results of operations for any interim period are not necessarily indicative of results to be
expected for a full year. The condensed consolidated balance sheet of the Company at December
25, 2005, has been derived from audited financial statements but does not include all
disclosures required by GAAP. These financial statements and footnote disclosures should be
read in conjunction with the Companys audited consolidated financial statements and notes
thereto for the year ended December 25, 2005, which appear in the Companys Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 27, 2006 and Amendment
No. 1 thereto filed on March 31, 2006.Disclosures About Fair Value of Financial InstrumentsThe Companys financial instruments include cash and cash equivalents, accounts receivable,
long-term debt, and a interest rate cap arrangement. The fair values of these instruments
approximate their carrying values other than long-term debt. As of September 24, 2006, the
fair value of the Companys 11% Senior Notes due 2013 was $149.2 million, and the fair value
of the Companys term loan under its senior credit facilities was $195.5 million.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from those estimates and assumptions.
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Stock Based CompensationThe matter discussed in this Note should be read in conjunction with the information
contained in Note 9. In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123R, Share-Based Payment(SFAS 123R). SFAS 123R is a revision of SFAS No.
123, Accounting for Stock-Based Compensation(SFAS 123), and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB 25), and its
related implementation guidance. On December 26, 2005, the Company adopted the provisions of
SFAS 123R using the prospective method. Under the prospective method, the Company accounted
for awards outstanding as of December 25, 2005 using the accounting principles originally
applied, SFAS 123 and APB 25. For awards issued after December 25, 2005 and for awards
modified after December 25, 2005, the Company accounts for awards at fair value using the
accounting principles under SFAS 123R. The Company is permitted to apply the prospective
method under SFAS 123R because the Company elected to use the minimum value method of
measuring share options for pro forma disclosure purposes under SFAS123 in prior periods.
Had the Company elected to use the fair value method for pro forma disclosure purposes under
SFAS 123, it would have been required to recognize more compensation expense in its Statement
of Operations under SFAS 123R for periods beginning on or after December 25, 2005.SFAS 123R requires entities to recognize compensation expense for awards of equity
instruments to employees based on the grant-date fair value of those awards. SFAS 123R also
requires the benefits of tax deductions in excess of recognized compensation expense to be
reported as a financing cash flow, rather than as an operating cash flow as prescribed under
the prior accounting rules. This requirement reduces net operating cash flows and increases
net financing cash flows in periods after adoption. Total cash flow remains unchanged from
what would have been reported under prior accounting rules.Prior to the adoption of SFAS 123R, the Company followed the intrinsic value method in
accordance with APB 25 to account for its employee stock options. Accordingly, compensation
expense was recognized when the fair value of the grant exceeded the exercise price. The
adoption of SFAS 123R primarily resulted in a change in the Companys method of recognizing
the fair value of share-based compensation and estimating forfeitures for all unvested
awards. Specifically, the adoption of SFAS 123R resulted in the recording of compensation
expense at the grant date for employee stock options. The effect of adopting SFAS 123R was to
record compensation expense related to 2006 grants of less than $0.1 million for the three
months ended September 24, 2006 and $0.3 million ($0.2 million after tax) for the nine months
ended September 24, 2006.There was no material impact to the Companys operating or financing cash flow or net loss in
the period of adoption. When applying the prospective method, the Company is not permitted
to provide pro forma disclosures as was previously required under SFAS 123. As a result of
the merger transactions described in Note 2 below, the Companys capital structure and its
stock compensation plans changed significantly. Consequently, the stock-based compensation
information for the nine months ended September 24, 2006 is not comparable to the nine months
ended September 25, 2005. As such, comparative data is not presented in the Notes related to
stock-based compensation.Comprehensive Income (Loss)Comprehensive income (loss) consists of net loss and the change in fair value of the
Companys interest cap for the three months and nine months ended September 24, 2006 and
September 25, 2005 as follows (dollars in thousands):
 THREE MONTHS ENDED
    
    
    NINE MONTHSSUCCESSOR
    
    
    SUCCESSOR
    
    
    SUCCESSOR
    
    
    SUCCESSOR
    
    
    PREDECESSORMay 25 
    
    
    December 27,September 24,
    
    
    September 25,
    
    
    September 24,
    
    
    September 25,
    
    
    2004  May 24,2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2005Net income (loss)
    
    $
    (4,260
    )
    
    $
    507
    
    
    $
    (4,836
    )
    
    $
    (3,993
    )
    
    $
    (440
    )Other comprehensive income
(loss)Change in fair value
of interest rate cap
    
    
    (46
    )
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    Income tax benefit
    
    
    17
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    Comprehensive income (loss)
    
    $
    (4,289
    )
    
    $
    507
    
    
    $
    (4,865
    )
    
    $
    (3,993
    )
    
    $
    (440
    )
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Recent Accounting PronouncementsIn February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 (SFAS
155), Accounting for Certain Hybrid Financial Instruments, which amends FASB Statements
No. 133 (SFAS 133), Accounting for Derivative Instrument and Hedging Activities and No.
140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 155 eliminates the exemption of applying SFAS 133 to interests in
securities and financial assets so that similar instruments are accounted for similarly
regardless of the term of the instruments. The Company will adopt this new accounting
standard on January 1, 2007. The Company is currently evaluating the impact of the adoption
of SFAS 155 on its financial statements, although it presently does not anticipate the
adoption of SFAS 155 to have a material impact on its financial statements.In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 (SFAS
156), Accounting for Servicing of Financial Assets  an amendment of FASB Statement No.
140. SFAS 156 requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a servicing
contract under certain conditions. The Company will adopt this new accounting standard on
January 1, 2007. The Company is currently evaluating the impact of the adoption of SFAS 156
on its financial statements, although it presently does not anticipate that the adoption of
SFAS 156 will have a material impact on its financial statements.In March 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement 109. The statement seeks
to clarify the significant diversity in practice associated with financial statement
recognition and measurement in accounting for income taxes. The Company will adopt this new
standard at the beginning of its annual reporting period that begins after December 15, 2006.
The Company is currently evaluating the impact of the adoption of FIN 48 on its financial
statements.In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (SFAS
158), Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an
amendment to FASB Statements No. 87, 88, 106 and 132(R). The statement requires employers to
recognize the overfunded or underfunded status of a defined benefit postretirement plan as an
asset or liability in its statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through comprehensive income. SFAS 158
also requires an employer to measure the funded status of a plan as of the date of its
year-end statement of financial position, with limited exceptions. The Company is required
to apply SFAS 158 as of the end of 2007. The Company is currently evaluating the impact of
the adoption of SFAS 158 on its financial statements.(2)
    
    Merger TransactionsEffective May 25, 2005, IAAI became a direct, wholly-owned subsidiary of Axle Holdings, which
is owned by the LLC (which is controlled by Kelso). As part of the merger transactions, IAAI
entered into new senior credit facilities, comprised of a $50.0 million revolving credit
facility and a $115.0 million term loan, which were guaranteed by all of IAAIs then existing
domestic subsidiaries. As part of the merger transactions, IAAI also issued $150.0 million
of 11% Senior Notes due 2013. IAAI received approximately $143.6 million of cash equity
contributions from Kelso, Parthenon, the other investors and certain members of management in
connection with the merger transactions.IAAI used the net proceeds of these financings and equity contributions to (i) fund the cash
consideration payable to the Companys shareholders and option holders under the merger
agreement; (ii) repay outstanding principal and accrued interest under the Companys prior
credit facility; and (iii) pay related transaction fees and expenses.The merger was recorded in accordance with Statement of Financial Accounting Standards No.
141 (SFAS 141), Business Combinations. The Company recorded its assets and liabilities
at their estimated fair values derived from managements estimates and judgment based upon
valuations and information currently available. The Company believes that the valuations and
estimates are a reasonable basis for the allocation of the purchase price. The following
table summarizes the estimated fair value of the assets acquired and liabilities assumed in
connection with the merger transactions (in thousands):
 6




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##### Table of Contents



Current assets
    
    $
    110,180Property, plant, & equipment
    
    
    75,957Deferred income tax asset
    
    
    14,781Goodwill
    
    
    187,984Income tax receivable
    
    
    5,064Intangibles
    
    
    131,500Debt issuance cost
    
    
    9,357Other
    
    
    804Total assets
    
    $
    535,627Current liabilities
    
    $
    59,659Capital lease obligation
    
    
    1,142Senior notes
    
    
    150,000Credit facilities
    
    
    115,000Deferred income tax liability
    
    
    44,540Unfavorable leases
    
    
    3,800Other
    
    
    12,233Total liabilities
    
    $
    386,374Net assets acquired
    
    $
    149,253
 These valuations resulted in recognition of $131.5 million of intangibles, which consists of
$102.5 million in customer relationships, $0.6 million in non-compete agreements, $14.9
million in trade names, and $13.5 million in proprietary software.Significant Items Affecting ComparabilityThe merger transactions resulted in a new basis of accounting under SFAS 141. This change
creates many differences between reporting for IAAI post-merger, as successor, and IAAI
pre-merger, as predecessor. Accordingly, the predecessor financial data for periods ending on
or prior to May 24, 2005, generally will not be comparable to the successor financial data
for periods after that date.(3)
    
    Accounts ReceivableAccounts receivable consisted of the following as of September 24, 2006 and December 25, 2005
(in thousands):
 September 24,
    
    
    December 25,2006
    
    
    2005Unbilled receivables
    
    $
    36,437
    
    
    $
    35,534Trade accounts receivable
    
    
    14,937
    
    
    
    11,458Other receivables
    
    
    1,018
    
    
    
    41252,392
    
    
    
    47,404Less allowance for doubtful accounts
    
    
    (425
    )
    
    
    (484
    )$
    51,967
    
    
    $
    46,920
 Unbilled receivables represent amounts paid to third parties on behalf of insurance companies
for which the Company will be reimbursed when the vehicle is sold. Trade accounts receivable
include fees and other amounts to be collected from both salvage providers and buyers.
 7




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##### Table of Contents



(4)
    
    Property and EquipmentProperty and equipment consisted of the following at September 24, 2006 and December 25, 2005
(in thousands):
 September 24,
    
    
    December 25,2006
    
    
    2005Land
    
    $
    5,051
    
    
    $
    5,051Buildings and improvements
    
    
    8,338
    
    
    
    6,534Equipment
    
    
    26,934
    
    
    
    27,295Leasehold improvements
    
    
    54,258
    
    
    
    44,52594,581
    
    
    
    83,405Less accumulated depreciation
and amortization
    
    
    (16,734
    )
    
    
    (6,174
    )$
    77,847
    
    
    $
    77,231
 Interest on borrowed funds is capitalized in connection with the construction of certain
long-term assets. Capitalized interest for the nine months ended September 24, 2006 was
$0.2 million, and $0.1 million for the three months ended September 25, 2005, $0.2
million from May 25, 2005 through September 25, 2005, and $0.2 million from December 27,
2004 through May 24, 2005.(5)
    
    Goodwill and Other IntangiblesThe Company tests goodwill for impairment annually during the second quarter and continually
reviews whether a triggering event has occurred to determine whether the carrying value
exceeds the fair value. The fair value is based generally on discounted projected cash
flows, but the Company also considers factors such as comparable industry price multiples.
The Company employs cash flow projections that it believes to be reasonable under current and
forecasted circumstances.Goodwill activity for the three months and nine months ended September 24, 2006 includes
current year acquisitions described in Note 12, adjustments related to the purchase price
allocation of certain prior period acquisitions due to the finalization of such allocations
and earn-out payment made for prior period acquisitions.Goodwill activity for the three months and nine months ended September 24, 2006 was as
follows (in thousands):
 AmountBalance at December 25, 2005
    
    $
    191,266Acquisition
    
    
    2,295Adjustments to valuation of prior period acquisitions
    
    
    (264
    )Balance at March 26, 2006
    
    $
    193,297Acquisitions
    
    
    14,688Earn-out and valuation adjustment for prior period acquisitions
    
    
    (1,357
    )Balance at June 25, 2006
    
    $
    206,628Acquisition of Auto Disposal Systems, Inc.
    
    
    44,418Other acquisitions
    
    
    3,021Adjustments to valuation of prior period acquisitions
    
    
    (5,347
    )Balance at September 24, 2006
    
    $
    248,720
 8




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##### Table of Contents



CostSeptember 24,
    
    
    December 25,Assigned Life
    
    2006
    
    
    2005(in millions)SuccessorGoodwill
    
    Indefinite
    
    $
    248.7
    
    
    $
    191.3Customer relationships
    
    15-20 years
    
    
    123.5
    
    
    
    102.5Trade names
    
    15 years
    
    
    14.9
    
    
    
    14.9Software
    
    6 years
    
    
    13.5
    
    
    
    13.5Covenants not to compete
    
    12 to 60 months
    
    
    2.1
    
    
    
    0.7$
    402.7
    
    
    $
    322.9
 Accumulated AmortizationSeptember 24,
    
    
    December 25,Assigned Life
    
    2006
    
    
    2005(in millions)SuccessorCustomer relationships
    
    15-20 years
    
    $
    (7.2
    )
    
    $
    (3.1
    )Trade names
    
    15 years
    
    
    (1.3
    )
    
    
    (0.6
    )Software
    
    6 years
    
    
    (3.0
    )
    
    
    (1.3
    )Covenants not to compete
    
    12 to 60 months
    
    
    (0.8
    )
    
    
    (0.2
    )$
    (12.3
    )
    
    $
    (5.2
    )
 The Company also continually reviews whether events and circumstances subsequent to the
acquisition of any long-lived assets, such as property and equipment or intangible assets
subject to amortization, have occurred that indicate that the remaining useful lives of those
assets may warrant revision or that the remaining balance of those assets may not be
recoverable. If events and circumstances indicate that the long-lived assets should be
reviewed for possible impairment, the Company uses projections to assess whether future cash
flows on a non-discounted basis related to the tested assets are likely to exceed the
carrying value of those assets to determine if a write-down is appropriate. If the Company
identifies impairment, it will measure and report a loss to the extent that the carrying
value of the impaired assets exceeds their fair values as determined by valuation techniques
appropriate in the circumstances that could include the use of similar projections on a
discounted basis.In determining the estimated useful lives of definite lived intangibles, the Company
considers the nature, competitive position, life cycle position, and historical and expected
future cash flows of each asset and the Companys commitment to support these assets through
continued investment and legal infringement protection.Based upon existing intangibles, the projected annual amortization expense is $8.9 million
for 2006, $8.7 million for 2007 and $8.6 million for each of the years 2008 through 2010.(6)
    
    Long-term DebtLong-term debt consisted of the following at September 24, 2006 and December 25, 2005:
 September 24,
    
    
    December 25,2006
    
    
    2005(in thousands)11% senior notes
    
    $
    150,000
    
    
    $
    150,000Senior secured credit facilities
    
    
    195,000
    
    
    
    114,326345,000
    
    
    
    264,326Less current installments
    
    
    1,950
    
    
    
    1,143$
    343,050
    
    
    $
    263,183
 9




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##### Table of Contents



Senior NotesThe Company has outstanding $150.0 million of 11% Senior Notes due April 1, 2013. The
unsecured notes are non-callable for four years, after which they are callable at a premium
declining ratably to par at the end of year six. The notes contain covenants that among
other things, limit the issuance of additional indebtedness, the creation of liens, the
payment of dividends or other distributions, distributions from certain subsidiaries, the
issuance of preferred stock, the sale of assets and subsidiary stock, transactions with
affiliates and consolidations, mergers and transfers of assets. All of these limitations and
prohibitions, however, are subject to a number of important qualifications set forth in the
indenture. In addition, the notes are fully guaranteed by the Companys subsidiaries. A
description of the guarantee and the required financial disclosures
are provided in Note 14.Credit FacilitiesOn June 29, 2006, the Company amended and restated its senior secured credit facilities. As
of September 24, 2006, the amended and restated senior secured credit facilities consists of
a $50.0 million revolving credit facility, a $195.0 million term loan and a $10.0 million
delayed draw term loan commitment. The Company has not drawn on the $50.0 million revolving
credit facility or the delay draw term loan. On November 30, 2006, the Company elected to
terminate the delayed draw term loan commitment.The term loan is payable in quarterly installments equal to 0.25% of the aggregate principal
amount, beginning December 31, 2006, with the balance payable on May 19, 2012. The senior
secured credit facilities are subject to mandatory prepayments and reduction in an amount
equal to (i) the net proceeds of certain debt issuances, asset sales, recovery events, and
sales and leasebacks of real property, (ii) 50% of the net proceeds of certain equity
offerings or contributions by Axle Holdings, and (iii) for any fiscal year ending on or after
December 31, 2005, 75% of excess cash flow, as defined in the credit agreement, when the
consolidated leverage ratio, as defined in the credit agreement, is 4.0 or greater, or 50% of
excess cash flow when the consolidated leverage ratio is at least 3.0 but less than 4.0.The senior secured credit facilities are secured by a perfected first priority security
interest in all present and future tangible and intangible assets of the Company and the
guarantors, including the capital stock of the Company and each of its direct and indirect
domestic subsidiaries.Under the terms of the credit agreement, interest rates and borrowings are based upon, at the
Companys option, Eurodollar or prime rates. The terms of the agreement include a commitment
fee based on unutilized amounts and an annual agency fee. The agreement includes covenants
that, among other things, limit or restrict the Companys and its subsidiaries abilities to
dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other
indebtedness, including the senior notes, pay dividends, create liens, make equity or debt
investments, make acquisitions, modify the terms of the indenture, engage in mergers, make
capital expenditures and engage in certain affiliate transactions. The Company may not pay
dividends except to pay certain corporate overhead expenses not to exceed $1.0 million in any
fiscal year or to pay certain costs incurred by the Companys parent, Axle Holdings, Inc, as
defined in the credit agreement. The agreement also requires the Company to at all times
have at least 50% of the aggregate principal amount of the notes and the term loan subject to
either a fixed interest rate or interest rate protection for a period of not less than two
years. The senior secured credit facilities are subject to the following financial covenants:
(i) minimum consolidated interest coverage, and (ii) maximum consolidated leverage. As of
November 30, 2006, the Company reduced its delayed draw term loan commitment to zero. The
Company had not drawn on this commitment.The Company was in compliance with these credit agreement covenants as of September 24, 2006.There were no borrowings under the revolver as of September 24, 2006 or during the quarter
then ended. The Company had outstanding letters of credit in the aggregate amount of $2.2
million as of September 24, 2006. The letters of credit reduce the borrowing capacity under
the revolver.During the period December 26, 2005 to September 24, 2006, the weighted average annual
interest rate for the new senior credit facilities was 7.5%. A commitment fee of 0.50% on the
unused portion of the senior credit facilities is payable on a quarterly basis. As of
September 24, 2006, $47.8 million was available for borrowing under the senior credit
facilities.
 10




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##### Table of Contents



As a result of the amendment, the Company recognized a $1.8 million loss on the early
extinguishment of debt related to the write-off of previously deferred debt issuance costs,
fees paid to repay a portion of the original debt, and other costs.Financial Instruments and Hedging ActivitiesThe Company is required under its amended senior credit facilities agreement to enter into
and maintain an interest rate protection arrangement to provide that at least 50% of the
aggregate principal amount under the senior note and senior credit facilities is subject to
either a fixed interest rate or interest rate protection for a period of not less than two
years. In accordance with this requirement, the Company entered into interest rate cap
agreements. The agreements cap the interest rate of $100.0 million of the outstanding
principal at 6.0%. At September 24, 2006, the interest rate cap qualifies for hedge
accounting and all changes in the fair value of the cap were recorded, net of tax, through
other comprehensive loss. At September 24, 2006, the Company recorded less than $0.1
millions (net of tax) as a comprehensive loss to the change in fair market value.(7)
    
    Shareholders equityThe additional paid-in capital increased to $151.0 million as of September 24, 2006 from
$149.5 million as of December 25, 2005. The increase is a result of $1.4 million of
stock-based compensation and contributed capital of $0.1 million.(8)
    
    Income TaxesIncome taxes were computed using the effective tax rates estimated to be applicable for the
full fiscal years, which are subject to ongoing review and evaluation by us. The Companys
effective income tax provision rate for continuing operations was 23.4% and 26.1% for the
three and nine months ended September 24, 2006, respectively, compared to 68.4% and (321.8)%
for the same periods past year. The Companys effective income tax rate varies from the
statutory federal income tax rate of 35%, due to the impact of state income tax provisions in
certain jurisdictions and certain meals and entertainment, merger costs and early
extinguishment that are not fully deductible.(9)
    
    Employee Benefit PlansStock Based Compensation
 Axle Holdings Plan
    11




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##### Table of Contents



WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicExercise
    
    
    Life
    
    
    ValueOptions
    
    
    Price
    
    
    (in months)
    
    
    (in thousands)Outstanding at December
25, 2005
    
    
    526,704
    
    
    $
    19.33
    
    
    
    96.4
    
    
    $
    4,969Options granted
    
    
    8,000
    
    
    
    25.62Options forfeited
    
    
    (6,000
    )
    
    
    25.62Options exercised
    
    
    0
    
    
    
    0Outstanding at March 26, 2006
    
    
    528,704
    
    
    $
    19.36
    
    
    
    96.1
    
    
    $
    7,776Options granted
    
    
    22,000
    
    
    
    34.07Options forfeited
    
    
    (3,000
    )
    
    
    25.62Options exercised
    
    
    0
    
    
    
    0Outstanding at June 25, 2006
    
    
    547,704
    
    
    $
    19.92
    
    
    
    94.1
    
    
    $
    6,630Options granted
    
    
    13,000
    
    
    
    32.13Options forfeited
    
    
    (4,500
    )
    
    
    25.17Options exercised
    
    
    0
    
    
    
    0Outstanding at September 24,
2006
    
    
    556,204
    
    
    $
    20.16
    
    
    
    91.7
    
    
    $
    6,602Exercisable at September 24,
2006
    
    
    275,904
    
    
    $
    13.63
    
    
    
    73.2
    
    
    $
    5,051
   Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 24, 2006
    
    September 24, 2006Expected life (in years)
    
    
    6.0
    
    
    
    6.0Risk-free interest rate
    
    
    4.2
    %
    
    
    4.2-5.0
    %Expected volatility
    
    
    43
    %
    
    
    43
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  12




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##### Table of Contents



LLC Profit Interests
     (10)
    
    Commitments and ContingenciesLeasesIAAI leases certain facilities and equipment under operating and capital leases. As of
September 24, 2006, IAAI had not entered into any new capital leases in the current year. In
the ordinary course of business, the Company has entered several operating leases relating to
real estate and certain equipment.Texas FloodingOn March 19, 2006, the Companys Grand Prairie, Texas facility was flooded when the local
utility opened reservoir flood gates causing the waters of Mountain Creek to spill over into
the facility, resulting in water damage to the majority of vehicles on the property as well
as interior office space. We have recorded an estimated loss of $0.3 million for the three
months ended September 24, 2006 and a loss of $3.5 million for the nine months ended
September 24, 2006, which is comprised of an estimated $3.1 million in losses on vehicles
impacted by the flood, $0.8 million for damaged interior office space, $0.6 million related
to clean-up of the facility, and an offset of $1.0 million in proceeds from our insurance
carrier, which were received in October 2006. The Company has resumed auctions at the
facility.
 13




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##### Table of Contents



The $3.1 million loss related to the vehicles impacted by the flood is based on post-flood
auction results, including the vehicle sale proceeds and revenue, less all related expenses.
As of September 24, 2006, the Company had sold approximately 86% of the vehicles impacted by
the flood, resulting in actual losses of $2.7 million. Future sales of remaining flood
vehicles may differ from the Companys initial estimates.OtherThe Company is subject to certain miscellaneous legal claims, which have arisen during the
ordinary course of the Companys business. None of these claims are expected to have a
material adverse effect on the Companys financial condition or operating results.(11)
    
    Related-Party TransactionsUnder the terms of a financial advisory agreement, IAAI pays Kelso an annual financial
advisory fee of $0.5 million, payable quarterly in advance, for services to be provided by
Kelso to IAAI, and reimburses Kelsos expenses incurred in connection with these services.
The financial advisory agreement provides that IAAI indemnify Kelso, Axle Holdings and
Kelsos officers, directors, affiliates, and their respective partners, employees, agents and
control persons (as such term is used in the Securities Act of 1933, as amended, and the
rules and regulations thereunder) in connection with the merger transactions (including the
financing of the merger), Kelsos investment in and control of IAAI, and the services
rendered to IAAI under the financial advisory agreement. The financial advisory agreement
also provides for the payment of certain fees and the reimbursement of related expenses by
IAAI to Kelso in connection with any future investment banking services.(12)
    
    Acquisitions and DivestituresIn the first three quarters of 2006, the Company acquired several salvage pools throughout
the United States in exchange for cash. Each acquisition expands and complements IAAIs
existing market coverage. The acquisitions are accounted for as purchase business
combinations and the results of operations of the acquired businesses are included in the
Companys consolidated financial statements from the respective dates of acquisition. The
Company has made preliminary estimates of the assets purchased and liabilities assumed. The
allocation of purchase price will be completed within one year from the acquisition dates.On August 25, 2006, the Company acquired Salvage Management of Syracuse located in Cicero,
New York. On July 13, 2006, the Company acquired Lenders & Insurers with three facilities
located in Des Moines, Cedar Falls, and Sioux City, Iowa. On June 29, 2006, the Company
acquired Gardners Insurance Auto Auction located in Missoula, Montana, and acquired all of
the outstanding shares of capital stock of Auto Disposal Systems, Inc., or ADS, an Ohio
Corporation, headquartered in Dayton, Ohio. The ADS acquisition included seven locations in
Cincinnati, Cleveland, Columbus, Dayton, and Lima, Ohio and Ashland, Kentucky and Buckhannon,
West Virginia. The aggregate purchase price of all of these acquisitions is approximately
$70.8 million. The Company has made preliminary estimates of its allocation of each purchase
price and may make further adjustments to the preliminary allocation in subsequent periods.
The purchase price of these acquisitions includes $3.4 million in accounts receivable, $0.6
million in inventory, $0.8 million in non-compete agreements, $0.2 million in fixed assets,
$2.8 million in prepaid expenses, $0.3 million in accounts payable and accrued expenses, $0.7
million in deferred tax liability, $16.6 million in customer relationships, with the
remaining $47.5 million being composed of goodwill.In the first and second quarter of 2006, the Company acquired Indiana Auto Storage Pool Co.,
Inc. located in Indianapolis, Indiana, Indiana Auto Storage Pool Co., Inc. located in South
Bend, Indiana, and NW Penn Auction Sales/Warren County Salvage located in Erie, Pennsylvania.
The aggregate purchase price of these acquisitions is $19.0 million, which is comprised of
$1.0 million in accounts receivable, $0.3 million in inventory, $0.5 million in non-compete
agreements, $4.3 million in customer relationships and $12.9 million in goodwill.
 14




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##### Table of Contents



The following table reflects the Companys unaudited pro forma results as if the acquisitions
occurred on December 25, 2005 (in thousands):
 Three Months Ended
    
    Nine Months EndedSeptember 24,
    
    September 25,
    
    September 24,
    
    September 25,2006
    
    2005
    
    2006
    
    2005Revenue
    
    $
    83,498
    
    
    $
    74,956
    
    
    $
    250,748
    
    
    $
    230,364Income (loss) before taxes
    
    
    (3,464
    )
    
    
    (1,003
    )
    
    
    (5,373
    )
    
    
    3,210Net income (loss)
    
    $
    (2,578
    )
    
    $
    (652
    )
    
    $
    (4,775
    )
    
    $
    2,086
 The pro forma results reflect the incremental interest related to the new debt, changes in
amortization and depreciation expense due to the change in basis of the underlying assets and
their related remaining lives, and the addition of the annual financial advisory service fee
for services provided by Kelso.(13)
    
    Subsequent EventsOn November 27, 2006, the Company received a Notice of Default from the trustee for the
holders of the 11% Senior Notes due 2013 (the Notes). Under the terms of the indenture
governing the Notes, the Company has an obligation to file, within the time period specified
in Securities and Exchange Commission (SEC) rules and regulations, all quarterly reports
that would be required to be filed with the SEC if the Company were required to file such
reports. According to the Notice, the Companys failure to timely file its Quarterly Report
on Form 10-Q (the Form 10-Q) for the period ended September 24, 2006 will constitute an
Event of Default under the indenture unless the Company files the Form 10-Q within sixty (60)
days from the date of the Notice. The Company has filed its quarterly report for the period
ended September 24, 2006 within sixty days of the date of notice.On December 22, 2006, the Company announced that it plans to combine operations with ADESA,
Inc. following a transaction in which Kelso, Parthenon and other investors will purchase all
of the common stock of ADESA, Inc. As part of the transaction, IAAI will be contributed to
the surviving corporation in exchange for common stock simultaneously with the closing of the
transaction with ADESA. The transaction would include a refinancing of the Companys
existing 11% Senior Notes due 2013 through commencement of a tender offer.
 15




---



##### Table of Contents



(14)
    
    Supplemental Guarantor InformationThe obligations of the Company under the senior notes and the credit facilities (see Note 6)
are guaranteed by the Companys wholly owned subsidiaries (Guarantor Subsidiaries). The
guarantees are full, unconditional, and joint and several. The unaudited supplemental
condensed consolidating information is as follows:
 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATING BALANCE SHEETS
(dollars in thousands)
(unaudited)
 SEPTEMBER 24, 2006SUCCESSORELIMINATIONSGUARANTOR
    
    
    ANDPARENT
    
    
    SUBSIDIARIES
    
    
    ADJUSTMENTS
    
    
    TOTALASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,658
    
    
    $
    9,208
    
    
    $
    
    
    
    $
    34,866Accounts receivable, net
    
    
    25,027
    
    
    
    26,940
    
    
    
    
    
    
    
    51,967Inventories
    
    
    9,753
    
    
    
    9,446
    
    
    
    
    
    
    
    19,199Income taxes receivable
    
    
    2,878
    
    
    
    1,127
    
    
    
    (1,127
    )
    
    
    2,878Deferred income taxes
    
    
    7,417
    
    
    
    1,436
    
    
    
    
    
    
    
    8,853Other current assets
    
    
    4,765
    
    
    
    2,836
    
    
    
    
    
    
    
    7,601Total current assets
    
    
    75,498
    
    
    
    50,993
    
    
    
    (1,127
    )
    
    
    125,364Investment in and advances to subsidiaries,
net
    
    
    90,567
    
    
    
    
    
    
    
    (90,567
    )
    
    
    Property and equipment, net
    
    
    41,951
    
    
    
    35,896
    
    
    
    
    
    
    
    77,847Intangible assets, net
    
    
    141,690
    
    
    
    
    
    
    
    
    
    
    
    141,690Goodwill
    
    
    248,720
    
    
    
    
    
    
    
    
    
    
    
    248,720Other assets
    
    
    7,591
    
    
    
    927
    
    
    
    
    
    
    
    8,518$
    606,017
    
    
    $
    87,816
    
    
    $
    (91,694
    )
    
    $
    602,139LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    41,353
    
    
    $
    5,557
    
    
    $
    
    
    
    $
    46,910Accrued liabilities
    
    
    16,675
    
    
    
    3,399
    
    
    
    
    
    
    
    20,074Obligations under capital leases
    
    
    254
    
    
    
    
    
    
    
    
    
    
    
    254Current installments of
long-term debt
    
    
    1,950
    
    
    
    
    
    
    
    
    
    
    
    1,950Total current liabilities
    
    
    60,232
    
    
    
    8,956
    
    
    
    
    
    
    
    69,188Deferred income taxes
    
    
    37,421
    
    
    
    
    
    
    
    (1,127
    )
    
    
    36,294Other liabilities
    
    
    9,204
    
    
    
    3,499
    
    
    
    
    
    
    
    12,703Obligations under capital leases
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    158Long-term debt, excluding current
installments
    
    
    193,050
    
    
    
    
    
    
    
    
    
    
    
    193,050Senior notes
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    150,000Investments by and advances from parent
company, net
    
    
    
    
    
    
    90,567
    
    
    
    (90,567
    )
    
    
    Total liabilities
    
    
    450,065
    
    
    
    103,022
    
    
    
    (91,694
    )
    
    
    461,393Shareholders equity (deficit)
    
    
    155,952
    
    
    
    (15,206
    )
    
    
    
    
    
    
    140,746$
    606,017
    
    
    $
    87,816
    
    
    $
    (91,694
    )
    
    $
    602,139
 16




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##### Table of Contents



INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 THREE MONTHS ENDED SEPTEMBER 24, 2006SUCCESSORELIMINATIONSGUARANTOR
    
    
    ANDPARENT
    
    
    SUBSIDIARIES
    
    
    ADJUSTMENTS
    
    
    TOTALRevenues
    
    $
    33,088
    
    
    $
    50,410
    
    
    $
    
    
    
    $
    83,498Cost of Sales
    
    
    28,556
    
    
    
    36,912
    
    
    
    
    
    
    
    65,468Gross margin
    
    
    4,532
    
    
    
    13,498
    
    
    
    
    
    
    
    18,030Operating expense:Selling, general and administrative
    
    
    4,281
    
    
    
    9,163
    
    
    
    
    
    
    
    13,444Loss (gain) on sale of property and equipment
    
    
    (49
    )
    
    
    14
    
    
    
    
    
    
    
    (35
    )Loss related to flood
    
    
    
    
    
    
    281
    
    
    
    
    
    
    
    2814,232
    
    
    
    9,458
    
    
    
    
    
    
    
    13,690Income from operations
    
    
    300
    
    
    
    4,040
    
    
    
    
    
    
    
    4,340Other (income) expense:Interest expense
    
    
    8,231
    
    
    
    2,602
    
    
    
    (2,602
    )
    
    
    8,231Loss on early extinguishment of debt
    
    
    1,771
    
    
    
    
    
    
    
    
    
    
    
    1,771Other income
    
    
    (2,704
    )
    
    
    
    
    
    
    2,602
    
    
    
    (102
    )Income (loss) before taxes
    
    
    (6,998
    )
    
    
    1,438
    
    
    
    
    
    
    
    (5,560
    )Income tax (benefit) provision
    
    
    (1,636
    )
    
    
    336
    
    
    
    
    
    
    
    (1,300
    )Net income (loss)
    
    $
    (5,362
    )
    
    $
    1,102
    
    
    $
    
    
    
    $
    (4,260
    )
 17




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##### Table of Contents



INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 NINE MONTHS ENDED SEPTEMBER 24, 2006SUCCESSORELIMINATIONSGUARANTOR
    
    
    ANDPARENT
    
    
    SUBSIDIARIES
    
    
    ADJUSTMENTS
    
    
    TOTALRevenues
    
    $
    107,191
    
    
    $
    132,264
    
    
    $
    
    
    
    $
    239,455Cost of Sales
    
    
    89,348
    
    
    
    93,690
    
    
    
    
    
    
    
    183,038Gross margin
    
    
    17,843
    
    
    
    38,574
    
    
    
    
    
    
    
    56,417Operating expense:Selling, general and administrative
    
    
    13,814
    
    
    
    22,867
    
    
    
    
    
    
    
    36,681Gain on sale of property and equipment
    
    
    (17
    )
    
    
    (1
    )
    
    
    
    
    
    
    (18
    )Loss related to flood
    
    
    
    
    
    
    3,451
    
    
    
    
    
    
    
    3,45113,797
    
    
    
    26,317
    
    
    
    
    
    
    
    40,114Income from operations
    
    
    4,046
    
    
    
    12,257
    
    
    
    
    
    
    
    16,303Other (income) expense:Interest expense
    
    
    21,424
    
    
    
    7,252
    
    
    
    (7,252
    )
    
    
    21,424Loss on early extinguishment of debt
    
    
    1,771
    
    
    
    
    
    
    
    
    
    
    
    1,771Other income
    
    
    (7,600
    )
    
    
    
    
    
    
    7,252
    
    
    
    (348
    )Income (loss) before taxes
    
    
    (11,549
    )
    
    
    5,005
    
    
    
    
    
    
    
    (6,544
    )Income tax (benefit) provision
    
    
    (3,014
    )
    
    
    1,306
    
    
    
    
    
    
    
    (1,708
    )Net income (loss)
    
    $
    (8,535
    )
    
    $
    3,699
    
    
    $
    
    
    
    $
    (4,836
    )
 18




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##### Table of Contents



INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 FOR THE NINE MONTHS ENDED SEPTEMBER 24, 2006SUCCESSORELIMINATIONSGUARANTOR
    
    
    ANDPARENT
    
    
    SUBSIDIARIES
    
    
    ADJUSTMENTS
    
    
    TOTALNet cash provided by (used) in operating activities
    
    $
    22,339
    
    
    $
    7,298
    
    
    $
    
    
    
    $
    29,637Cash flows from investing activities:Capital expenditures
    
    
    (6,395
    )
    
    
    (5,720
    )
    
    
    
    
    
    
    (12,115
    )Payments
made in connection with acquisitions, net of cash acquired
    
    
    (88,955
    )
    
    
    
    
    
    
    
    
    
    
    (88,955
    )Proceeds from disposal of property and equipment
    
    
    1,327
    
    
    
    41
    
    
    
    
    
    
    
    1,368Net cash used in investing activities
    
    
    (94,023
    )
    
    
    (5,679
    )
    
    
    
    
    
    
    (99,702
    )Cash flows from financing activities:Contributed capital
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    150Payment of financing and other fees
    
    
    (1,491
    )
    
    
    
    
    
    
    
    
    
    
    (1,491
    )Principal payments on long-term debt
    
    
    (33,224
    )
    
    
    
    
    
    
    
    
    
    
    (33,224
    )Proceeds from amended term loan
    
    
    113,898
    
    
    
    
    
    
    
    
    
    
    
    113,898Principal payments on capital leases
    
    
    (284
    )
    
    
    
    
    
    
    
    
    
    
    (284
    )Net cash provided by (used) in financing activities
    
    
    79,049
    
    
    
    
    
    
    
    
    
    
    
    79,049Net increase in cash
    
    
    7,365
    
    
    
    1,619
    
    
    
    
    
    
    
    8,984Cash at beginning of period
    
    
    18,293
    
    
    
    7,589
    
    
    
    
    
    
    
    25,882Cash at end of period
    
    $
    25,658
    
    
    $
    9,208
    
    
    $
    
    
    
    $
    34,866
 19




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial statements and notes
thereto included elsewhere in this Quarterly Report on Form 10-Q (Report). This Report contains
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and 27A of the Securities Act of 1933, as amended. Discussions containing such
forward-looking statements may be found in this Part I, Item 2 and elsewhere within this Report
generally. In addition, when used in this Report, the words believes, anticipates, expects,
should and similar words or expressions are intended to identify forward-looking statements.
Although we believe that our plans, intentions and expectations as reflected in or suggested by
such forward-looking statements are reasonable, such forward-looking statements are subject to a
number of risks and uncertainties that could cause actual results to differ materially from the
forward-looking statements made in this Report. Many such factors are outside our control.
Consequently, these forward-looking statements should be regarded solely as our current plans,
estimates and beliefs. We do not undertake and specifically decline any obligation to publicly
release the results of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events. All forward looking-statements attributable to
persons acting on our behalf are expressly qualified in their entirety by these cautionary
statements. Our actual results could differ materially from those discussed in or implied by
forward-looking statements for various reasons, including those discussed in the Risk Factors
section of our Form 10-K/A for the year ended December 25, 2005.
 Please refer to IAAIs Form 10-K/A for managements discussion and analysis of the financial
condition and results of operations of IAAI for the year ended December 25, 2005. The following
is managements discussion and analysis of the financial condition and results of operations of
IAAI for the three and nine months ended September 24, 2006.
 
 Overview
  
 Significant Items Affecting Comparability
  20




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##### Table of Contents



Acquisitions and New Operations
  
 Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 24,
    
    
    September 25,
    
    
    September 24,
    
    
    September 25,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Revenues:Fee income
    
    $
    69,535
    
    
    $
    58,087
    
    
    $
    202,680
    
    
    $
    180,532Vehicle sales
    
    
    13,963
    
    
    
    10,056
    
    
    
    36,775
    
    
    
    30,41783,498
    
    
    
    68,143
    
    
    
    239,455
    
    
    
    210,949Cost of sales:Branch cost
    
    
    52,847
    
    
    
    42,456
    
    
    
    151,066
    
    
    
    129,491Vehicle cost
    
    
    12,621
    
    
    
    8,643
    
    
    
    31,972
    
    
    
    25,93565,468
    
    
    
    51,099
    
    
    
    183,038
    
    
    
    155,426Gross margin
    
    
    18,030
    
    
    
    17,044
    
    
    
    56,417
    
    
    
    55,523Operating expense:Selling, general and administrative
    
    
    13,444
    
    
    
    10,182
    
    
    
    36,681
    
    
    
    29,404Loss (gain) on sale of property and
equipment
    
    
    (35
    )
    
    
    351
    
    
    
    (18
    )
    
    
    (528
    )Loss related to flood
    
    
    281
    
    
    
    
    
    
    
    3,451
    
    
    
    Merger costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,76213,690
    
    
    
    10,533
    
    
    
    40,114
    
    
    
    49,638Income (loss) from operations
    
    
    4,340
    
    
    
    6,511
    
    
    
    16,303
    
    
    
    5,885Other (income) expense:Interest expense
    
    
    8,231
    
    
    
    6,350
    
    
    
    21,424
    
    
    
    9,559Loss on early extinguishment of debt
    
    
    1,771
    
    
    
    
    
    
    
    1,771
    
    
    
    Other income
    
    
    (102
    )
    
    
    (140
    )
    
    
    (348
    )
    
    
    (2,623
    )Income (loss) before taxes
    
    
    (5,560
    )
    
    
    301
    
    
    
    (6,544
    )
    
    
    (1,051
    )Income taxes
    
    
    (1,300
    )
    
    
    (206
    )
    
    
    (1,708
    )
    
    
    3,382Net income (loss)
    
    $
    (4,260
    )
    
    $
    507
    
    
    $
    (4,836
    )
    
    $
    (4,433
    )
 Results of Operations
 Three Months Ended September 24, 2006 Compared to the Three Months Ended September 25, 2005
   21




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##### Table of Contents



Nine Months Ended September 24, 2006 Compared to the Nine Months Ended September 25, 2005
       22




---



##### Table of Contents



Financial Condition and Liquidity
         23




---



##### Table of Contents




    
    incur additional indebtedness, including guarantees;
    
    create, incur, assume or permit to exist liens on property or assets;
    
    engage in sales, transfers and other dispositions of our property or assets;
    
    declare or pay dividends to, make distributions to, or make redemptions and
repurchases from, equity holders;
    
    make or commit to make capital expenditures over certain thresholds;
    
    make loans and investments and enter into acquisitions and joint ventures;
    
    prepay, redeem or repurchase our debt, or amend or modify the terms of certain
material debt or certain other agreements; and
    
    restrict our ability and the ability of our subsidiaries to pay dividends and make
distributions.
  24




---



##### Table of Contents



TwelveMonthsThree Months Ended
    
    
    EndedDecember
    
    
    March 26,
    
    
    June 25,
    
    
    September 24,
    
    
    September 24,25, 2005
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006Net loss
    
    $
    (1,441
    )
    
    $
    (504
    )
    
    $
    (71
    )
    
    $
    (4,260
    )
    
    $
    (6,276
    )Income taxes
    
    
    185
    
    
    
    (314
    )
    
    
    (94
    )
    
    
    (1,300
    )
    
    
    (1,523
    )Interest expense (net)
    
    
    5,865
    
    
    
    6,329
    
    
    
    6,618
    
    
    
    8,129
    
    
    
    26,941Depreciation and amortization
    
    
    5,515
    
    
    
    4,933
    
    
    
    5,641
    
    
    
    6,573
    
    
    
    22,662EBITDA
    
    
    10,124
    
    
    
    10,444
    
    
    
    12,094
    
    
    
    9,142
    
    
    
    41,804Non-cash charges
    
    
    365
    
    
    
    1,051
    
    
    
    343
    
    
    
    576
    (1)
    
    
    2,335Non-recurring expense (income)
    
    
    (171
    )
    
    
    2,866
    
    
    
    815
    
    
    
    3,160
    (2)
    
    
    6,670Advisory service fees
    
    
    125
    
    
    
    125
    
    
    
    125
    
    
    
    125
    
    
    
    500Consolidated EBITDA
    
    $
    10,443
    
    
    $
    14,486
    
    
    $
    13,377
    
    
    $
    13,003
    
    
    $
    51,309
 
 (1)
    
    For the quarter ended September 24, 2006, the non-cash charges included $0.3 million
of stock-based compensation expense and $0.3 million of rent adjustment relating to
amortization of lessor funded improvements and straight-line adjustment related to
leases.(2)
    
    For the quarter ended September 24, 2006, non-recurring expense consisted of $1.1
million in acquisition related costs, a $0.3 million loss related to the Grand Prairie,
Texas flood, and $1.8 million loss on the early extinguishment of debt.   
    
    100% of the net cash proceeds of certain debt issuances, and sales and leasebacks of
real property, subject to certain exceptions;
    
    50% of the net cash proceeds from the issuance of additional equity interests; and
    
    100% of the net cash proceeds from any property or asset sale or recovery event in
an amount exceeding $2.5 million in any fiscal year, subject to certain exceptions and
reinvestment requirements.
   25




---



##### Table of Contents




    
    borrow money;
    
    incur liens;
    
    pay dividends or make certain other restricted payments or investments;
    
    issue disqualified stock;
    
    merge, consolidate or sell all or substantially all of our or their assets;
    
    enter into transactions with affiliates;
    
    create restrictions on dividends or other payments by the restricted subsidiaries;
    
    sell certain assets and use proceeds from asset sales; and
    
    create guarantees of indebtedness by restricted subsidiaries.
     26




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##### Table of Contents



INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATING BALANCE SHEETS
(dollars in thousands)
 
 DECEMBER 25, 2005SUCCESSORELIMINATIONSGUARANTOR
    
    
    ANDPARENT
    
    
    SUBSIDIARIES
    
    
    ADJUSTMENTS
    
    
    TOTALASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,293
    
    
    $
    7,589
    
    
    $
    
    
    
    $
    25,882Accounts receivable, net
    
    
    27,037
    
    
    
    19,883
    
    
    
    
    
    
    
    46,920Inventories
    
    
    10,871
    
    
    
    8,740
    
    
    
    
    
    
    
    19,611Income taxes receivable
    
    
    2,732
    
    
    
    
    
    
    
    
    
    
    
    2,732Deferred income taxes
    
    
    7,228
    
    
    
    1,283
    
    
    
    
    
    
    
    8,511Other current assets
    
    
    4,069
    
    
    
    1,254
    
    
    
    
    
    
    
    5,323Total current assets
    
    
    70,230
    
    
    
    38,749
    
    
    
    
    
    
    
    108,979Investments in and advances to subsidiaries, net
    
    
    85,081
    
    
    
    
    
    
    
    (85,081
    )Property and equipment, net
    
    
    42,906
    
    
    
    34,325
    
    
    
    
    
    
    
    77,231Intangible assets, net
    
    
    126,378
    
    
    
    
    
    
    
    
    
    
    
    126,378Deferred taxes, non current
    
    
    
    
    
    
    3,518
    
    
    
    (3,518
    )
    
    
    Goodwill
    
    
    191,266
    
    
    
    
    
    
    
    
    
    
    
    191,266Other assets
    
    
    10,246
    
    
    
    760
    
    
    
    
    
    
    
    11,006$
    526,107
    
    
    $
    77,352
    
    
    $
    (88,599
    )
    
    $
    514,860LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    32,273
    
    
    $
    5,749
    
    
    $
    
    
    
    $
    38,022Accrued liabilities
    
    
    14,856
    
    
    
    2,589
    
    
    
    
    
    
    
    17,445Obligations under capital leases
    
    
    367
    
    
    
    
    
    
    
    
    
    
    
    367Current installments of long-term debt
    
    
    1,143
    
    
    
    
    
    
    
    
    
    
    
    1,143Total current liabilities
    
    
    48,639
    
    
    
    8,338
    
    
    
    
    
    
    
    56,977Deferred income taxes
    
    
    41,100
    
    
    
    
    
    
    
    (3,518
    )
    
    
    37,582Other liabilities
    
    
    9,926
    
    
    
    2,839
    
    
    
    
    
    
    
    12,765Obligations under capital leases
    
    
    329
    
    
    
    
    
    
    
    
    
    
    
    329Long-term debt, excluding current installments
    
    
    113,183
    
    
    
    
    
    
    
    
    
    
    
    113,183Senior notes
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    150,000Investments by and advances from parent
company, net
    
    
    
    
    
    
    85,081
    
    
    
    (85,081
    )
    
    
    Total liabilities
    
    
    363,177
    
    
    
    96,258
    
    
    
    (88,599
    )
    
    
    370,836Shareholders equity (deficit)
    
    
    162,930
    
    
    
    (18,906
    )
    
    
    
    
    
    
    144,024$
    526,107
    
    
    $
    77,352
    
    
    $
    (88,599
    )
    
    $
    514,860
 27




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##### Table of Contents



INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 THREE MONTHS ENDED SEPTEMBER 25, 2005SUCCESSORELIMINATIONSGUARANTOR
    
    
    ANDPARENT
    
    
    SUBSIDIARIES
    
    
    ADJUSTMENTS
    
    
    TOTALRevenues
    
    $
    33,650
    
    
    $
    34,493
    
    
    $
    
    
    
    $
    68,143Cost of Sales
    
    
    26,993
    
    
    
    24,106
    
    
    
    
    
    
    
    51,099Gross margin
    
    
    6,657
    
    
    
    10,387
    
    
    
    
    
    
    
    17,044Operating expense:Selling, general and administrative
    
    
    4,967
    
    
    
    5,215
    
    
    
    
    
    
    
    10,182Loss on sale of property and equipment
    
    
    157
    
    
    
    194
    
    
    
    
    
    
    
    3515,124
    
    
    
    5,409
    
    
    
    
    
    
    
    10,533Income from operations
    
    
    1,533
    
    
    
    4,978
    
    
    
    
    
    
    
    6,511Other (income) expense:Interest expense
    
    
    6,350
    
    
    
    1,508
    
    
    
    (1,508
    )
    
    
    6,350Other income
    
    
    (1,648
    )
    
    
    
    
    
    
    1,508
    
    
    
    (140
    )Income (loss) before taxes
    
    
    (3,169
    )
    
    
    3,470
    
    
    
    
    
    
    
    301Income tax (benefit) provision
    
    
    (1,646
    )
    
    
    1,440
    
    
    
    
    
    
    
    (206
    )Net income (loss)
    
    $
    (1,523
    )
    
    $
    2,030
    
    
    $
    
    
    
    $
    507
 28




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INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 FOR THE PERIOD MAY 25, 2005 TO SEPTEMBER 25, 2005SUCCESSORELIMINATIONSGUARANTOR
    
    
    ANDPARENT
    
    
    SUBSIDIARIES
    
    
    ADJUSTMENTS
    
    
    TOTALRevenues
    
    $
    45,696
    
    
    $
    45,397
    
    
    $
    (589
    )
    
    $
    90,504Cost of Sales
    
    
    37,186
    
    
    
    31,635
    
    
    
    (589
    )
    
    
    68,232Gross margin
    
    
    8,510
    
    
    
    13,762
    
    
    
    
    
    
    
    22,272Operating expense:Selling, general and administrative
    
    
    7,379
    
    
    
    6,203
    
    
    
    
    
    
    
    13,582Gain on sale of property and equipment
    
    
    169
    
    
    
    199
    
    
    
    
    
    
    
    368Merger costs
    
    
    5,021
    
    
    
    
    
    
    
    
    
    
    
    5,02112,569
    
    
    
    6,402
    
    
    
    
    
    
    
    18,971Income (loss) from operations
    
    
    (4,059
    )
    
    
    7,360
    
    
    
    
    
    
    
    3,301Other (income) expense:Interest expense
    
    
    8,992
    
    
    
    1,835
    
    
    
    (1,835
    )
    
    
    8,992Other income
    
    
    (2,974
    )
    
    
    958
    
    
    
    1,835
    
    
    
    (181
    )Income (loss) before taxes
    
    
    (10,077
    )
    
    
    4,567
    
    
    
    
    
    
    
    (5,510
    )Income tax (benefit) provision
    
    
    (3,412
    )
    
    
    1,895
    
    
    
    
    
    
    
    (1,517
    )Net income (loss)
    
    $
    (6,665
    )
    
    $
    2,672
    
    
    $
    
    
    
    $
    (3,993
    )
 29




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INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 FOR THE PERIOD DECEMBER 27, 2004 to MAY 24, 2005PREDECESSORELIMINATIONSGUARANTOR
    
    
    ANDPARENT
    
    
    SUBSIDIARIES
    
    
    ADJUSTMENTS
    
    
    TOTALRevenues
    
    $
    58,944
    
    
    $
    62,601
    
    
    $
    (1,100
    )
    
    $
    120,445Cost of Sales
    
    
    46,358
    
    
    
    41,936
    
    
    
    (1,100
    )
    
    
    87,194Gross margin
    
    
    12,586
    
    
    
    20,665
    
    
    
    
    
    
    
    33,251Operating expense:Selling, general and administrative
    
    
    2,964
    
    
    
    12,858
    
    
    
    
    
    
    
    15,822Loss on sale of property and equipment
    
    
    (60
    )
    
    
    (836
    )
    
    
    
    
    
    
    (896
    )Merger costs
    
    
    15,741
    
    
    
    
    
    
    
    
    
    
    
    15,74118,645
    
    
    
    12,022
    
    
    
    
    
    
    
    30,667Income (loss) from operations
    
    
    (6,059
    )
    
    
    8,643
    
    
    
    
    
    
    
    2,584Other (income) expense:Interest expense
    
    
    567
    
    
    
    2,634
    
    
    
    (2,634
    )
    
    
    567Other income
    
    
    (4,118
    )
    
    
    (958
    )
    
    
    2,634
    
    
    
    (2,442
    )Income (loss) before taxes
    
    
    (2,508
    )
    
    
    6,967
    
    
    
    
    
    
    
    4,459Income tax provision
    
    
    2,008
    
    
    
    2,891
    
    
    
    
    
    
    
    4,899Net income (loss)
    
    $
    (4,516
    )
    
    $
    4,076
    
    
    $
    
    
    
    $
    (440
    )
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INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 FOR THE PERIOD MAY 25, 2005 T0 SEPTEMBER 25, 2005SUCCESSORELIMINATIONSGUARANTOR
    
    
    ANDPARENT
    
    
    SUBSIDIARIES
    
    
    ADJUSTMENTS
    
    
    TOTALNet cash provided by (used) in operating activities
    
    $
    (10,058
    )
    
    $
    2,775
    
    
    $
    
    
    
    $
    (7,283
    )Cash flows from investing activities:Purchase of
IAAI, Inc.
    
    
    (356,753
    )
    
    
    
    
    
    
    
    
    
    
    (356,753
    )Capital expenditures
    
    
    (2,012
    )
    
    
    (3,892
    )
    
    
    
    
    
    
    (5,904
    )Payments
made in connection with acquisitions, net of cash acquired
    
    
    (271
    )
    
    
    
    
    
    
    
    
    
    
    (271
    )Proceeds from disposal of property and equipment
    
    
    31
    
    
    
    194
    
    
    
    
    
    
    
    225Net cash used in investing activities
    
    
    (359,005
    )
    
    
    (3,698
    )
    
    
    
    
    
    
    (362,703
    )Cash flows from financing activities:Contributed capital
    
    
    143,600
    
    
    
    
    
    
    
    
    
    
    
    143,600Payment of financing and other fees
    
    
    (13,530
    )
    
    
    
    
    
    
    
    
    
    
    (13,530
    )Principal payments on long-term debt
    
    
    (22,125
    )
    
    
    
    
    
    
    
    
    
    
    (22,125
    )Principal payments on capital leases
    
    
    (303
    )
    
    
    
    
    
    
    
    
    
    
    (303
    )Issuance of senior notes
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    150,000Issuance of term loan
    
    
    115,000
    
    
    
    
    
    
    
    
    
    
    
    115,000Net cash provided by (used) in financing activities
    
    
    372,642
    
    
    
    
    
    
    
    
    
    
    
    372,642Net increase (decrease) in cash
    
    
    3,579
    
    
    
    (923
    )
    
    
    
    
    
    
    2,656Cash at beginning of period
    
    
    21,746
    
    
    
    7,276
    
    
    
    
    
    
    
    29,022Cash at end of period
    
    $
    25,325
    
    
    $
    6,353
    
    
    $
    
    
    
    $
    31,678
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INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 FOR THE PERIOD DECEMBER 27, 2004 to MAY 24, 2005PREDECESSORELIMINATIONSGUARANTOR
    
    
    ANDPARENT
    
    
    SUBSIDIARIES
    
    
    ADJUSTMENTS
    
    
    TOTALNet cash provided by operating activities
    
    $
    18,585
    
    
    $
    5,014
    
    
    $
    
    
    
    $
    23,599Cash flows from investing activities:Capital expenditures
    
    
    (5,167
    )
    
    
    (3,054
    )
    
    
    
    
    
    
    (8,221
    )Payments
made in connection with acquisitions, net of cash acquired
    
    
    (600
    )
    
    
    
    
    
    
    
    
    
    
    (600
    )Proceeds from disposal of property and equipment
    
    
    191
    
    
    
    1,200
    
    
    
    
    
    
    
    1,391Net cash used in investing activities
    
    
    (5,576
    )
    
    
    (1,854
    )
    
    
    
    
    
    
    (7,430
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    905
    
    
    
    
    
    
    
    
    
    
    
    905Proceeds from short-term borrowings
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    3,000Principal payments on long-term debt
    
    
    (3,762
    )
    
    
    
    
    
    
    
    
    
    
    (3,762
    )Purchase of treasury stock
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Principal payments on capital leases
    
    
    (614
    )
    
    
    
    
    
    
    
    
    
    
    (614
    )Net cash used in financing activities
    
    
    (472
    )
    
    
    
    
    
    
    
    
    
    
    (472
    )Net increase in cash
    
    
    12,537
    
    
    
    3,160
    
    
    
    
    
    
    
    15,697Cash at beginning of period
    
    
    9,209
    
    
    
    4,116
    
    
    
    
    
    
    
    13,325Cash at end of period
    
    $
    21,746
    
    
    $
    7,276
    
    
    $
    
    
    
    $
    29,022
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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   33




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##### Table of Contents



Part II
Other Information
 
 Item 1. Legal Proceedings.
 Grand Prairie (Dallas), Texas Flood
   
 Item 1A. Risk Factors.
  
 Item 6. Exhibits and Report on Form 8-K.
 (a)
    
    Exhibits.See Index of Exhibits.(b)
    
    Reports onForm 8-K.We filed a current report on Form 8-K, dated August 10, 2006, which contained a press
release announcing our financial results for the quarter ended June 25, 2006.We filed a current report on Form 8-K, dated August 28, 2006, which contained a press
release announcing a change in the Companys certified public accountants.We filed a current report on Form 8-K, dated December 1, 2006, which contained a press
release announcing that we had received a Notice of Default from Wells Fargo Bank, NA
with respect to its 11% Senior Notes due 2013.We filed a current report on Form 8-K, dated December 29, 2006, which contained a press
release announcing the our plan to combine operations with ADESA, Inc.
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##### Table of Contents



SIGNATURES
  INSURANCE AUTO AUCTIONS, INC.Date:
January 8, 2007
    
    By:
    
    /s/ Scott P. PettitName:
    
    Scott P. PettitTitle:
    
    Senior Vice President and Chief Financial Officer(Duly Authorized Officer and Principal Financial Officer)
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##### Table of Contents



Exhibit No.
    
    Description of Document10.1
    
    Amendment to the Stock Incentive Plan of Axle Holdings, Inc. dated October 25, 2006.31.1
    
    Certification by the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification by the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 36